Deposit with India Inc

Fixed deposit is the most preferred way to invest for many investors. It is safe, hassle-free, and for a fixed term. It is also risk free and the depositors know the amount that they will receive at the end of the term of the fixed deposit. This is what makes them attractive.

Usually, when we think of fixed deposits, we think of depositing money in banks, which offer an interest and a term. We deposit our money and break it after the end of the term. In case of necessity before the term, we can also break it with some rider.

What many investors do not know or opt for is opening an fixed deposit with companies. Many big firms with strong financial standing and history offer fixed deposits, also known as corporate FD, to the general public. The rates offered by corporate deposits are better than banks. In few cases, if you are an employee of the company offering FD, the rates can be higher by 25-100 basis points (0.25 to one per cent).

Corporate FDs are certainly an alternative to traditional bank FD, although there are slight differences between the rates, risk associated, and tenure. We give you five important aspects that you need to consider before going for corporate FD.

The first and foremost consideration should be the interest rate offered by the company. Eventually, it is the return on FD that decides the quantum of money at the end of the tenure. A higher interest is certainly preferable than a lower one. Many times, investors tend to ignore small differences in interest rates. However, it can make a significant difference in the final value of deposit at the end of the tenure.

For example, an FD of Rs 5 lakh earning eight per cent becomes Rs 10.8 lakh after 10 years, while the same amount earning nine per cent interest balloons into Rs 11.84 lakh in the same period. This is a plump difference of Rs 1 lakh. For a larger sum and longer tenure, the difference will only compound. Company FDs offer better rates than that of banks. Hence, if your objective is high returns, then you can go for company FD.

Every company that offers fixed deposit scheme has to go through a rating process by rating agencies. These rating agencies consider company’s financials and its ability to pay interest and principal. Based on their findings, the rating agencies provide a rating to the company FD. Investors must look at the rating before deciding to invest in corporate FD. AAA and AA or any variant of this should be safe enough for you to invest.

The rating is an indicator of risk associated with the company FD. If the risk is low, the company gets higher rating while a low rating signifies higher risk. In general, a company with higher rating (and therefore low risk) will offer lower interest than a company having lower rating (so higher risk). The reason is simple. A company with higher risk has to offer extra incentive in the form of a higher interest rate to the general public to encourage them to invest in company FD.

Though it is not advisable to break an FD and withdraw prematurely, it may happen sometimes in cases of emergency. Investors should understand the process of premature withdrawal and any possible penalty associated with it. Most of corporate FDs are for a fixed term and any premature withdrawal will attract penalty.

Corporate FD schemes offers two variants; namely cumulative and non-cumulative. As evident, cumulative FD schemes are like any other FD scheme where the interest and principal are paid as a lump sum amount at the end of the maturity of scheme. The non-cumulative variants pay interest periodically depending on the plan. The interests can be paid quarterly, or half yearly or yearly.

The choice depends on the need of the individual investor. If you need better rates than banks on fixed deposit and do not need the money in short term, go for the cumulative plan. However, Investors who need cash flow at regular interval can go for non-cumulative scheme. For example, a retired professional may need cash flow at regular intervals. In such a case, a non-cumulative FD scheme from a financially strong company is a better choice.

Investors should see the different tenures offered by company FD and choose accordingly. Generally as the tenure becomes longer, the risk turns higher. Hence, if you are not comfortable with the risk associated with company FD, choose a shorter tenure.

Bank deposits are secured by deposit insurance and credit Guarantee Corpor-ation for a sum up to Rs 1 lakh. This means you will get up to Rs 1 lakh if the bank defaults on its payment. Nonetheless, bank deposits are usually safe unless there is big crisis in the banking sector and in the economy in general. However, this happens rarely, if at all. In case of corporate FD, the company has to ensure the payment at the end of the tenure. The company depe-nds on its own earnings to pay the depositors the final sum. So it is risker compared to bank FD.